How can bank card organizations use blockchain currency to expand their business?

Recently, a news about Visa Europe trying to transfer money through the Bitcoin network was reported by domestic media: "Detailed Explanation of Visa Europe's Bitcoin Remittance Application". Two authors from the National Engineering Laboratory for Electronic Payment and E-Commerce conducted an in-depth interpretation and analysis of the news and now share it with everyone.

The Origin of Epiphyte

Epiphyte is a crypto financial product technology service company, a startup founded in 2014. Epiphyte is positioned as a Fintech (technological finance, a bit like domestic Internet finance) service company, helping financial institutions develop mobile payment application products.

Epiphyte itself provides a blockchain-based SaaS service that enables timely settlement and DVP (delivery versus payment) of financial transactions. The Epiphyte system has unprecedented low-cost capabilities and is used not only by some of the world's largest financial institutions in foreign exchange, commodities, private equity, etc., but also by some service providers for global mobile phone payments and remittance payments. Therefore, the Epiphyte system makes it possible to complete the payment and collection of transactions at the same time, while traders can eliminate the risk of untrustworthy counterparties.

Epiphyte won the 2014 startup challenge at the SWIFT annual conference Sibos in Boston with its encryption product cBridge. Epiphyte uses bank blockchain technology to allow bank customers to trade in familiar fiat currencies, such as the US dollar and the euro, which are encrypted by the encryption product cBridge, so that banks do not need to hold digital cryptocurrencies. Banks can use Epiphyte's software to achieve a high degree of integration between digital cryptocurrencies and traditional finance, just like SWIFT.

What is BitPesa?

Safaricom, the parent company of BitPesa, is currently the most profitable company in East Africa. BitPesa combines its existing M-Pesa service to convert remittances into Kenyan shillings and send them to designated mobile wallets within 2-15 minutes.

Bitpesa is a remittance service that allows users to convert Bitcoin into Kenyan Shillings (KSH) and send it directly to the recipient’s mobile wallet account.

Mobile money is already taking off in Africa and around the world, where people deposit money into an account linked to their mobile number and use it to make purchases, send money to other people's mobile wallets or exchange it for paper money.

Safaricom, a Kenyan company, also owns the M-Pesa service, which is also a pioneer in the mobile wallet wave. Traditional finance is not popular in Kenya, and most of Kenya's banks are in large cities with few branches. Before the launch of M-PESA, 38% of Kenya's population had never used any financial services. Secondly, the corresponding service prices of commercial banks are also quite high. Compared with banks, M-PESA has obvious advantages. Almost every adult in Kenya has an M-pesa account, and one-third of the country's GDP is processed through this system. Users are charged a certain fee when transferring funds between accounts and withdrawing cash. These fees make Safaricom the most profitable company in East Africa.

Bit-pesa, which integrates seamlessly with M-Pesa and other mobile wallet platforms, allows people outside Kenya to send bitcoin to its platform, which then sends the corresponding amount of shillings to a designated mobile phone number. BitPesa says it charges 3% for this service.

Technical Implementation

Several companies were mentioned in the news, and the flow of funds can be seen in the following figure:

After Visa deducts the money from payer A's bank card, it purchases Bitcoin at the current bidding price through Epiphtye and deposits it into the Bitcoin account created by BitPesa for payee B. It then purchases Kenyan shillings through the M-Pesa account and transfers them to B's M-Pesa account.

It is not difficult to find from the entire remittance process that the companies that really support Bitcoin remittances are BitPesa and M-Pesa. Both companies are subsidiaries of Safaricom. Visa provides a channel for initiating remittances from traditional bank cards, while Epiphyte is a technology company that helps Visa and BitPesa implement mobile and backend integration.

Bitcoin Network Services

The news also mentioned that the remittance application was on the Bitcoin test network. The Bitcoin test network is also a global open blockchain network, which can be seen as a parallel network of the Bitcoin network, but with fewer nodes on the network. The Bitcoin test network is usually used for transactions and mining tests of new Bitcoin wallets (due to fewer nodes, the mining speed is faster).

By the way, let's mention the Bitcoin network technology services. The Bitcoin network as a whole is not operated in a unified manner, but it does not mean that there are no network services. On the contrary, due to the openness of the network, more service providers can freely access through nodes. The existing Bitcoin network services are roughly divided into two types: network browser services and Bitcoin bidding transaction services, as shown in the figure below.

The web browser services mainly include: 1. Monitoring the health of the network, including the overall distribution stability of the network and the stability of computing power; 2. Querying and tracking the accounting status of a certain address based on Bitcoin transaction records. Blocktrail mentioned in the news provides such services.

The Bitcoin bidding trading platform services mainly include: 1. Bitcoin and legal tender exchange bidding; 2. Bitcoin order trading, which is usually 24 hours a day. Bitpesa and M-Pesa provide such services.

Limitations of experimental applications

Although Visa's experiment in Europe was successful, there are still some difficulties to overcome in its implementation.

Since Bitpesa services are almost limited to Africa, Visa can only transfer money to Africa when Bitpesa services have not yet been fully rolled out. Moreover, by looking at the Bitpesa user manual in detail, its current service process still stipulates that after the first transaction, users need to upload an identity document issued by the local government to continue to use BitPesa services, so there are certain restrictions on the implementation policy.

The extreme volatility of Bitcoin is also a disadvantage to the business. If the user who buys Bitcoin does not send it to the other party immediately, the exchange rate of Bitcoin may rise (or fall) sharply in just a few hours or days. Since BitPesa converts Bitcoin into shillings immediately after receiving it, the recipient is not directly affected.

How to use blockchain currency network to expand business

The blockchain currency network has the advantage of ultra-low deployment costs. In most parts of the world, "payment services" in financial activities are dependent on "asset management services", that is, payment can only be derived from asset management. Bitpesa uses the Bitcoin network to build a "parallel payment network" that has nothing to do with "asset management".

The ultra-low construction cost is an important factor in Bitpesa's ability to build a parallel payment network. Not only the Bitcoin network, but any blockchain currency network only needs to develop a blockchain currency client, and the cost is almost negligible compared to building a centrally operated network. This makes it possible to build a payment network purely on technology without considering asset management business.

Since the central bank issued the first batch of third-party payment licenses in 2011, more than 270 companies have obtained third-party payment licenses. It is not difficult to see from these third-party lists that almost all of the companies that have obtained third-party payment licenses have already carried out asset management businesses such as prepaid card acquiring and Internet acquiring before obtaining payment licenses. The main purpose of obtaining payment licenses is to ensure the compliance of payment processes in the original business.

Since the second half of 2015, third-party payment companies have frequently faced bankruptcy crises, indirectly pointing out that the idea of ​​reducing payment costs by building their own payment networks is not realistic. The cost of establishing payment transfer centers for most third-party acquiring institutions far exceeds the business payment costs that can be saved.

It can be predicted that, except for a few third-party payment companies with large existing asset management businesses that can balance the costs of operating payment networks, other third-party payment companies will undergo large-scale business restructuring or even go bankrupt in the future.

In addition to working hard to increase the size of their own asset management businesses, these third-party payment companies facing crisis can also learn from Bitpesa. It is also an attempt to reduce their own payment network costs by using the Bitcoin network or building a new blockchain currency network.

How Bank Card Associations Can Use Blockchain Currency to Expand Their Business

The advantage of blockchain currency networks is the low cost of establishing payment network platforms. Visa has already noticed this advantage and started testing its remittance application reported in the news. It would not hurt for any bank card organization to try to connect to African payment service companies such as Bitpesa.

Bitpesa's model can be replicated in any region of the world where "asset management services are backward but payment services are urgently needed", and even promoted to regions where "payment services are monopolized".

Taking the expansion of international business by bank card organizations as an example, there are two possible reasons why it is difficult to promote business in a certain region:

1. The region’s financial infrastructure is insufficient, and there is no interbank clearing agency or regional bank card organization;

2. The region’s financial infrastructure is complete and a regional payment network has been formed, but it has signed exclusive agreements with other bank card organizations.

If the above two difficulties are encountered, and if permitted by local laws, the third-party payment institutions in the region can be encouraged to follow Bitpesa’s example and establish a new payment service network at the lowest cost by building their own blockchain currency network or directly using the Bitcoin network. Subsequently, payment services in the region can be carried out through the newly built network.

Author: Blockchain Finance